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Debt-Limit Shuffle Buys Time for 'Something Big’: Caroline Baum

July 8 (Bloomberg) -- Faced with an Aug. 2 drop-dead date
for raising the $14.3 trillion debt limit and encumbered with
two parties that don’t play well together, President Barack
Obama did what any president would do: He called a White House
summit. (Answers b, “appoint a czar,” and c, “create a
commission,” are incorrect in this instance.)

The invitations went out to the leaders of both parties for
yesterday’s powwow, “a unique opportunity to do something big”
about the budget deficit, according to Obama.

Unique? Big? Congress has raised the debt limit 10 times in
10 years. It’s not even unique for one party to hold the ceiling
hostage to partisan demands.

As for big, I would bet on something smaller: an agreement
based on budgetary sleight of hand (spending cuts on paper) and
political horse-trading, including concessions by Republicans on
revenue increases, that falls short of addressing runaway
entitlement spending and an inefficient, loophole-ridden tax
code that retards growth and saps government revenue.

As recently as last week, Obama was focused on closing tax
loopholes for “millionaires and billionaires”; now Social
Security is on the table. Republicans, who previously refused to
utter “tax increases,” have indicated a willingness to eliminate
some tax preferences as part of a deficit-reduction deal that
would raise the debt ceiling. (Lobbyists must be lining up to
advise on which tax breaks to protect.)

Time to Motivate

Summit participants called the meeting “constructive.”
(Translation: No one walked out.) Still, some lawmakers claim
there’s not enough time to hammer out something big before Aug.
2, which is when the U.S. will default on its debt, according to
Treasury.

Debt default is unthinkable, unlikely and unanticipated,
judging by the miniscule 3.15 percent yield on the 10-year
Treasury note.

It certainly was no surprise Congress would exceed its
borrowing authority sometime this spring or summer. And yet,
lawmakers never find the motivation to address the deficit in a
meaningful way until they run out of time to do it.

What if they had more time? The truth is, they can have it
if they want it.

In a June 30 paper, Veronique de Rugy and Jason Fitchner,
senior research fellows at George Mason University’s Mercatus
Center in Arlington, Virginia, outline steps Treasury can take
to meet its financial obligations and prevent a technical
default until the end of the fiscal year on Sept. 30, and
possibly longer.

Budgetary Brinkmanship

First, based on Congressional Budget Office estimates, tax
revenue of $2.2 trillion in fiscal 2011 will cover the $214
billion of interest on the debt, the authors write. Technical
default averted. Tax revenue is sufficient to cover Social
Security, Medicare and Medicaid outlays as well, de Rugy and
Fitchner write.

Second, the Treasury secretary can take “extraordinary
actions,” such as suspending investment in government pension
funds and the Social Security Trust Fund -- something Timothy
Geithner has been doing since the public debt hit the statutory
limit in May.

Third, Treasury can use cash on hand, including $113.5
billion of nonrestricted cash, or sell assets, such as gold,
foreign currency or assets acquired under the Troubled Asset
Relief Program. Such sales won’t yield enough to cover all the
bills, but Treasury can prioritize what payments to make.

“Oh, and by the way, they can always cut spending,” de Rugy
told me by e-mail after walking me through the budgetary
accounting on the phone.

Debt Limit Distraction

This is hardly a desirable solution. Yet if time is what
negotiators really need to produce “something big,” Geithner can
give it to them.

That said, the debt limit will have to be increased.

“There is no budget out there, including Paul Ryan’s, that
alleviates the need for a debt-ceiling increase,” de Rugy said.

Although this game of chicken over the debt limit is
preoccupying those in Washington and in the news media, it
really isn’t the issue.

“The tragic part is that, if we didn’t have a debt limit,
we’d still have a problem,” said Douglas Holtz-Eakin, former
director of the Congressional Budget Office and now president of
the American Action Forum, a Washington think tank.

That problem is the growing gap between what the U.S.
government has promised to pay retirees and what it collects in
taxes. The public doesn’t want its benefits touched. Nor does it
want to pay higher taxes.

The implication? Some brave souls in Washington are going
to have to do what’s right even if the voters think it’s wrong.

So to all those senators and representatives who claim time
is running out to do “something big,” the Treasury can buy you
some time. You need to get serious about the “big.”

(Caroline Baum, author of “Just What I Said,” is a
Bloomberg View columnist. The opinions expressed are her own.)